 Quick Pivot
The Big Noise
Bob Hoye
Institutional Advisors
Posted Jan 22, 2011
Many decades ago, commentators at important golf tournaments were stationed very close to the players and spoke in hushed terms. The ambiance was effective and these pages have long advocated that market news announcers should speak in hushed terms during the hard down days.
No concerns about that lately, as talking heads and headlines have been strident about "FOOD SHORTAGES!". From page 16 in the first part of 2009, the story has made front pages everywhere – along with the blame – too many people are causing global warming. One of the earliest such alarmists was Parson Malthus who in the late 1700s preached doom and gloom because there were too many people. In 1798 he published:
"The power of population is indefinitely greater than the power of the earth to produce subsistence for man."
Moreover, he hinted that the world would be better off with fewer of the lower classes. Today's alarmists are less elitist in only wanting to sacrifice the middle classes.
This writer took a degree in geophysics long before "scientists" sought a living by preaching global warming to governments. One of the observations prior to that seduction was that under a cooling trend the jet stream would take bigger loops. This helps explain last summer's weirdness with Sahara-like conditions in Moscow. Muscovites did not have to visit Tunisia, the jet stream took its weather very much North.
Similarly, but in another mode, the jet stream took temperatures in England (has the best temperature history) down to levels unrecorded since the late 1600s, which was at the extreme of the Little Ice Age. Increasing solar activity has been the main cause of warming since.
Recent weather disturbances and associated gales of hysteria are largely in the market and we have been watching for excessive readings on the price action.
For this, Ross is monitoring COW, which trades on Toronto. This is an ETF of global agricultural stocks and it is registering an Upside Exhaustion – the first one since the cyclical high in 2008. This is a leading signal and the ChartWorks will keep us up to date.
Often stocks lead trend changes in product prices. It’s usually reliable with base metal mining stocks and metal prices. More recently, the signal on Silver Wheaton (SLW) led the correction zone for silver. Last week, on base metal prices, we noted that Teck Resources had registered an Upside Exhaustion.
Of course this is within our Momentum Peak Forecaster that soared with highly-animated spirits to 1.28. Anything above 1.21 has been in dangerous territory. As we have been noting this only goes straight up when the markets do and the action can fail within a month or two.
One example important to today was registered in late 1973 when the big action in agricultural prices drove the Forecaster to 1.23. That one was a combination of business cycle, easy money and wild weather.
On that one, Stalinist traders in the former Soviet Union got the better of traders in the Western World. A strong El Nino changed the currents off the Peruvian Coast and the anchovy fishery crashed creating a sudden shortage of fishmeal. As this was developing, Communist Russia bought an important amount of agricultural products from any number traders and then on their forward sales tightened the squeeze.
Prices soared to the point where the US Wholesale Price Index doubled. Eventually, this became troubling to the authorities. They did not want people going around saying that prices had doubled so they changed the name to the Producer Price Index and rebased it to 100.
Headlines were about food shortages. Newsweek wrote: "Ominous signs that the earth's weather patterns have begun to change dramatically" leading to a "drastic decline in food production".
In another article, the same publication also did the alarmist thing and noted that climatologists were recommending covering the Arctic ice fields with carbon black, which would help end "Global Cooling".
Same old, same old – the main difference is that the "cause" was global cooling rather than global warming. The former tout did not live long, not because that cooling ended, but because cooling could not be seen to be "caused" by modern industry and too many people.
On the late 1973 signal, commodities went up for a couple of months in 1974. The Economist All Items Index fell 21 percent from 59.8 to 47.2 over the next year.
On the huge speculation in precious metals to January 1980 the Forecaster registered 1.37 as gold and silver soared to 850 and 48. Commodities plunged 34 percent over the next two years.
Our advice then was that "No matter how much the Fed prints stocks will outperform commodities". The point being made was that as offside speculators in hard assets were suffering liquidity problems stimulation by the still ambitious Fed would flow into Wall Street and the new paradigm would be inflation in financial assets.
Eventually, speculation in tangible assets joined the party in financial assets. In 2007 the action replicated the sensational conclusion of all the previous great bubbles. The first one completed in 1720 and the fifth in 1929. Number six climaxed in 2007 and the global economy has been enjoying the first post-bubble business cycle since June 2009.
As outlined over the last couple of weeks, when our Forecaster registers with hot action in commodities a recession immediately follows. Examples include the November 1973 signal and that recession began in November 1973. The next was in December 1979 and the recession started that month.
This time around, the Forecaster registered 1.28 at the end of December and it will be interesting to see when the NBER makes the decision on the next recession and – more importantly – when it actually began. It is usually a year after the start. The table of Announcement Dates is attached.
STOCK MARKETS
We had a possible target of 1275 S&P, or higher. At 1296, the "or" seems to be working out within the parameters of our Momentum Peak Forecaster when the action becomes impetuous – until it burns out. Stocks have been an important feature of the All-One- Market (AOM) phenomenon.
The exceptional bullish sentiment readings are now accompanied by the highest weekly RSIs since last April and in 2007.
It is uncertain how long this can run, but overall speculation has reached a measurable condition that has preceded failure.
CURRENCIES
The key "news" turning point for the plunging dollar was at 75.6 in early November when the Fed announced "QE 2", the latest in a series of euphemisms for currency depreciation. Actually, this was within our model for an important low for the DX. This includes the Downside Capitulation and the Sequential Buy pattern.
This initial bounce took it to 81.4 and the correction has been to 78.3 this week. With the Forecaster it could go a little lower, but it has had a noteworthy drop in the RSI which is beginning to limit the decline.
When it starts, the next leg up will be very interesting.
The Canadian dollar has been enjoying the buzz and reached the RSI level that stopped the rally at 100.5 in April. The higher high at 101.5 may not be the top, but the RSI is starting to exert some gravity.
CHARACTER CHANGE
Last week we noted the character change in the gold/silver ratio, which had set a higher low and a higher high. This has continued with another such stair step up that has taken the ratio above the 50-day moving average. This marks the end of a pattern that prevailed since August, and adds to the character change.
This change has been expected to anticipate the equivalent change in the All-One-Market phenomenon and today's setbacks to stocks, corporate bonds and commodities is interesting.
This is a minor setback and won't be conclusive until the AOM sets a lower low and a lower high.
COMMODITIES
As outlined above, the play in commodities has become rather loud and eligible for correction. Within this set back is that our Forecaster is indicating a cyclical high followed by a recession bear market.
Today's weakness includes base metals, grains, meats and energy prices.
Yesterday, the CRB set an outside reversal to the downside and the decline continues today with a 1% loss. Taking out 320 will technically set the downtrend.
GOLD SECTOR
The Correction Zone for precious metals has been expected to run until late in the month. The signal for the turn down was the RSI on the silver/gold ratio getting to 86 in November. The next signal was the Upside Exhaustion for Silver Wheaton, which anticipated the high for silver.
The gold/silver ratio has increased from 46.1 three weeks ago to 48.9 today. Rising through 50 will set the uptrend, which would signal the advent of the next phase of liquidity concerns.
Our comment about "Too many analysts have been drinking the silver Kool-Aid" would be enhanced by a leading silver analyst explaining that there is no fundamental reason for the drop in silver prices relative to gold.
Out of this period of correction, gold's real price will likely resume its uptrend, which has been one of the features of a post-bubble contraction.
With the first business recovery our Gold/Commodities Index declined from 519 reached with the panic that ended in March 2009. At 340 lately, this representative of gold's real price and mining profitability should soon begin a material advance.
Problem is that gold shares will decline with a significant decline in the NYSE. Over the longer term this sector will accomplish outstanding gains while most orthodox stocks will net out significant losses.
National Bureau of Economic Research (NBER)
Announcement dates:
The June 2009 trough was announced September 20, 2010.
The December 2007 peak was announced December 1, 2008.
The November 2001 trough was announced July 17, 2003.
The March 2001 peak was announced November 26, 2001.
The March 1991 trough was announced December 22, 1992.
The July 1990 peak was announced April 25, 1991.
The November 1982 trough was announced July 8, 1983.
The July 1981 peak was announced January 6, 1982.
The July 1980 trough was announced July 8, 1981.
The January 1980 peak was announced June 3, 1980.
Commodities Relative to Wages
- Commodities are again high relative to wages.
- We last used this in the summer of 2008.
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Jan 20, 2011
-Bob Hoye
Institutional Advisors
email: bobhoye@institutionaladvisors.com
website: www.institutionaladvisors.com
Hoye Archives
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